Two Ways the Gov’t Can Cut Costs While Strengthening Israel

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Who would have thought that Yesh Atid, the party buoyed on the waves made by the 2011 socio-economic protests in Israel, would be the one to present the problematic budget the Government of Israel has prepared for 2013-2014. As commentators from Left to Right have written, the main problem with the budget isn’t necessarily its items; the problem is its lack of creativity and ingenuity. Primarily, the budget represents a plan to right the fiscal wrongs of the previous four years by doing something old school: raise taxes on the productive classes.

That’s quite unfortunate, given that Israel’s productive classes are those struggling under an already difficult tax burden. And that’s without taking into account the indirect ‘taxation’ of inflated prices and reduced access to resources that makes it harder to earn a living and raise a family in Israel than in many of the countries Israelis most often compare our country to.

More, as has been covered extensively in the media , Israel’s productive class is shrinking. The non-Haredi, non-Arab population of Israel has a baseline unemployment that can be compared to that of other OECD nations. But both the Haredi and Arab populations — the fastest growing demographics in the State – have unemployment that reaches above 50%. If things do not change soon, without growing the pie, so to speak, the public will have to do with a smaller piece to feed more people.

That is why the Government of Israel should at the very least pursue a strategy that reduces expenses while growing the employment pool. Here are two ways the Finance Minister can cut costs and grow jobs: first, ensure pensions are paid only to those individuals not working, or not earning a salary of adequate size. Second, change the corporate tax structure to incentivize investment in Israeli labor.

1. Pensions Are For The Retired. As TheMarker has extensively covered, the State of Israel pays an amazing amount every year in pensions, so much so that the amount paid in pensions to retired IDF officers is reportedly three times that paid to currently working teachers. Our total obligation to pensions is estimated at 257 billion shekels at the moment, and our total pension obligations are expected to grow to above 600 billion shekels in the next 23 years. If you think this year’s budget crisis is bad, just imagine what will happen when those pensions come to maturity.

We owe it to people who serve the State to provide support in their times of need. The main challenge has to do with the pensions we are paying to IDF officers who retire in their 30s and 40s, and go on to get jobs in the free market – while collecting a pension from the State. Those who risk their lives for the State of Israel deserve our ever-present gratitude and support, and should go on to live a comfortable life knowing that the rest of their years are as worry-free as possible. But there are many thousands of retired officers who leave the IDF to go on to build lucrative careers and winning startups, earning many times the national median income. These officers should not be harmed, but neither should they receive benefits that no longer make sense in a world where post-service careers await. One way the State of Israel could quickly reduce its expenses is to make a simple statement: We will only pay pensions to those individuals who are actually retired, or those earning less than, say, twice the national median income.

Yair Lapid has a soft spot in his heart for the officers of the IDF, as do many, as do I. Many have paid the ultimate price, and the others gave years of their lives to ensure the State is safe and secure. We should ensure that part of the money saved from paying premature pensions goes to increasing wages for the IDF’s professional class, so those who serve will be paid market rates or as close as possible. And the rest of the billions that will be saved should be used to strengthen our infrastructure and schools, and cover the debt.

2. Tax Breaks for Real Job Creators. While Knesset members target Israel’s largest companies to increase corporate tax proceeds, few if any have thought about the basic structure of our corporate tax regime and how it could be improved. One way to do so would be to institute what would be in essence a ‘progressive income tax’ system for corporations. Instead of the current system, which treats every company equally no matter who they employ and where they invest, the State should focus on taxing profits based on brackets, and providing tax credits for money spent on local payroll. In other words, companies without profit would still pay no taxes; companies with small to medium sized profits, measured in proportion to the number of Israeli citizen employees they have on salary, would pay taxes at a bracket above. And so on.

Asking companies to pay a flat 26% corporate tax rate makes as much sense as asking individual citizens to pay a quarter of their income in taxes, no matter what their income is. As recent years have shown, companies with huge cash reserves don’t create more jobs, and don’t necessarily invest in more innovation: Apple, for example, has more cash reserves than most sovereign nations and hasn’t used its cash to scale proportionally to its profit. More specifically to Israel, due to the proliferation of foreign workers in Israel in exactly those professions where unskilled or technical labor is most needed, our current flat tax regime motivates companies to cut costs by hiring non-Israeli citizens.

A shift of this nature needs to be finely tuned and in the short run may reduce direct corporate tax income to the State. But if done right, it would provide the incentives required for businesses small and large to source more of their services and manufacturing in Israel, and to expand their local labor pool knowing that such expansion would reduce their tax burden. The State in return will see growing demand for labor – and with the right help in continuing and technical education, grow employment in those very sectors that are fastest growing yet least engaged. More employed means more people paying taxes, both income and value-added. A healthier employment market means more production, more growth.

These two policy shifts could be implemented in a relatively short amount of time, but their impact will be long lasting. Thanks to the reduction in pension burdens, the State will have more money available to invest in the infrastructure to make tomorrow better, while reducing the burden placed on Israel’s productive class. Thanks to across the broad incentives a new corporate tax could would provide companies to hire more Israeli citizens, we’ll see more opportunities open up for the under-employed sectors, and more infrastructure investment by companies in Israel. If the Government of Israel, and its Finance Minister Yair Lapid, would like to present a budget the people can believe in, he could at the least include these two mechanisms to reduce expenditures and increase jobs.

About the Author

Ariel Beery is the CEO of MobileOCT, a medical device company based in Israel committed to transforming the discovery of cancers in epithelial tissue. Previously, he was the co-founder and Global CEO of the PresenTense Group, and he remains committed to its mission to realize the collective potential of the Jewish People.